Contractual Implications Of Delay And The Use Of Performance Bonds And Contractor's Default Insurance In The Construction Sector Essay.

Case Scenario: Pandemonium Projects Limited and QuantumLeap Construction Partnership LLP

Section A 
Legal Problem
Pandemonium Projects Limited (‘Pandemonium’) is a property development company that lives ‘in the fast lane’. There are usually too many projects going on at any one time and the company often finds itself drowning: unable to cope with the pressure of keeping so many plates spinning in the air at any one time. Pandemonium’s senior executives usually try to compensate for this by employing contractors with a fearsome reputation for getting the job done properly and on time.So, Pandemonium employs QuantumLeap Construction Partnership LLP (‘QuantumLeap’) to build a mixed retail and residential development not far from the centre of Canterbury in the southeast of England. QuantumLeap is content to be given this job as the contractor has had considerable experience of small projects like this going back many years and knows exactly how to assist developer clients who appear to be struggling with internal ‘pandemonium’ issues. The governing contract for the project is the JCT Standard Building Contract with Quantities 2016 (without amendments).Not unexpectedly, the project is beset with problems from the outset. Pandemonium is unable to give QuantumLeap access to the site on the scheduled start date, citing planning problems. As the development is to be built quite close to the centre of historic Canterbury, conservation issues have arisen that Pandemonium had not factored into its forward planning and which its advisers had either overlooked, or had drawn to Pandemonium’s attention only for the advice to be trivialised or brushed under the carpet at the time.
Pending being given access to the site, QuantumLeap has no option but to ‘sit twiddling their thumbs’ (as QuantumLeap’s director of operations describes it). Pandemonium finally allows QuantumLeap access to the site a full 12 weeks after the scheduled date of possession under the building contract. But before giving QuantumLeap possession of the sit QuantumLeap. The side letter mentions by name two master stonemasons employed by QuantumLeap: Arthur Hammer and Michael Chisel. In the side letter Pandemonium states that the company will be trusting QuantumLeap to get the work done properly (by deploying Hammer and Chisel on the job) and in a way that is fully compliant with the requirements of Canterbury’splanning authority.By the time QuantumLeap takes possession of the site it is well into winter and QuantumLeap is forced to put the works on hold as the weather markedly deteriorates. Gale force winds and blizzards arrivewith a vengeance, and this is followed by exceptionally heavy rain,all of which put the brakes on the project for a further week. When the works recommence, QuantumLeap is forced to hire in pumps to drain the flooded site – leading to yet more delay.Several months after commencing the works, QuantumLeap gets round to tackling installation of the decorative stonework. QuantumLeap insists on sub-contracting this work as Arthur Hammer and Michael Chisel have been redeployed on a project in Northern Ireland. Pandemonium resists this on the ground that the terms of the side letter (to which QuantumLeap agreed) are very clear. QuantumLeap’s director of operations points out that if possession of the site had been given to QuantumLeap on the originally scheduled date, Hammer and Chisel would both have been available to carry out the required work. 
Question (1)
Discuss the contractual implications of delay generally in this problem scenario; then carefully analyse the procedural steps under the JCT Standard Building Contract with Quantities 2016 which QuantumLeap should take with effect from the originally scheduled 
site possession date (and on the occasion of each relevant occurrence described in the problem scenario) in order to ensure thatQuantumLeap is legally and contractually in a position to secure any necessary adjustments or extensions to the originally scheduled date for completion of the works. Additionally, describe the procedural steps to be taken under the contract by Pandemonium’s architect/contract administrator in response.
Question (2)
Consider the consequence or effect of the contractual arrangement made in the side letter between Pandemonium and QuantumLeap on the overall contract and advise QuantumLeap, by reference to appropriate and applicable case law whether, regardless of the terms of the side letter, the latter may lawfully, and as a matter of contractual or legal right, proceed to sub-contract the installation of specialist stonework to a sub-contractor
Question (3)
Consider the hypothetical situation where, in the problem scenario, the contract is not as sophisticated as a published JCT contract but is instead a simple agreement put together by the parties who are non-lawyers (or even an exchange of letters of intent preliminary to a more formal arrangement that never materialises) that is silent onthe consequences of delaying events that can be attributed to the employer (i.e. in the problem scenario, Pandemonium’s failure to 
give QuantumLeap access to the site on the originally specified possession date is specifically of relevance).
Explain and critically discuss how the common law prevention principle and (in the construction context) the related concept of time being deemed to be ‘at large’ might operate to provide QuantumLeap with a practical way forward at the same time as affording a possible remedy under the law of contract. (Note that this part of the problem relates only to time. Questions around use of specialist stonemasons, and sub-contracting, are not relevant here.)
Section B.
In the recent past the use of contractor’s default insurance has become a familiar risk reallocation mechanism in the USA as an alternative to the use of more traditional performance bonds. Write a comparative piece (essay) critically evaluating the use ofperformance bonds (on one hand) and contractor’s default insurance (on the other) in the construction sector, in the context of the contractor/sub-contractor relationship.

Facts of the case:

Pandemonium Projects Limited is a very successful property development company. They are usually burdened with projects and cannot handle everything together. Hence they hire senior executives to accomplish the projects within the specified time. Pandemonium hires QuantumLeap Construction Partnership  LLP for the construction of a residential complex near Canterbury, south east of England. Satisfied with the task, QuantumLeap possessed the desired work experience. They knew how to assist the developers who had been prey to the overburdening of Pandemonium. The contract was named as JCT Standard Building Contract with Quantities 2016.

But the project faced several issues. Pandemonium could not provide QuantumLeap with the entry on the specified date. There were issues regarding planning. Since JCT was near Canterbury which possessed historical significance, preservation procedures needed to be undertaken. There was absence of forward planning by Pandemonium with the advisors. The real reason was that they had not paid attention to the issue. QuantumLeap had delay in proceeding their work. Finally the entry was made after 12 weeks from the specified date. Before providing with the possession of the site, Pandemonium demanded the exchange of site letters from QuantumLeap stating that it was an essential factor needed by the planners.

The side letter was printed with names of 2 stonemasons under QuantumLeap. They were Arthur Hammer and Michael Chisel. It was only written that Pandemonium expected that QuantumLeap would fulfill all the requirements of the Canterbury regulations and complete the work. Due to the previous delay, winter had set in and the weather conditions were not apt to continue the construction work. There were natural preventers in the form of heavy rain and blizzards and the work was delayed for a week. There was further delay because the are had been flo+oded. QuantumLeap hired pumps to drain out the water.

Arthur Hammer and Michael Chisel had been assigned with new work in Northern Ireland. So QuantumLeap requested Pandemonium to sub contract the building of decorative stonework. Pandemonium disagreed on account of the agreement in the side letter. QuantumLeap argued that if the site’s possession was granted to them on the specified date without delay, Arthur Hammer and Michael Chisel would be working under them.

After having a look at the facts of the case it can be stated that QuantumLeap Construction Partnership possesses the right to sub contract the tackling of installation of the decorative stonework under the JCT Standard Building Contract and Quantities 2016. The procedural steps under JCT Standard Building Contract with Quantities 2016 which QuantumLeap should take from the effect of the originally scheduled date of site possession  are given below. In the construction contract under the JCT both the parties should play a contribution in case of a delay caused due to negligence. There are also further delays which are neither caused by human intervention or negligence. Some delays are caused due to the ill conditions of weather. In this case, the compensation is not demanded, but an alternative workforce in the form of sub contracting to another party for the completion of the stonework decorations. The procedural steps under JCT with regard to the delay under  this case must be explained to QuantumLeap at every stage. In case the delay is justified, from day to day with sufficient cause then the contract cannot be sub contracted by QuantumLeap. In case, the delay cannot be justified by Pandemonium, then it must make ways to adjust with the workers of QuantumLeap. Pandemonium then should not create any problems with regard to the sub contracting. Even though, the side letters had written regulations, they could be altered according to the necessities.

Analysis and Legal Advice regarding Contractual Steps and Procedural Requirements under the JCT Standard Building Contract with Quantities 2016

The provisions of JCT have underwent various amendments in 2016. It has brought about the bringing of proof with regard to the insurance policies. Alterations have also been made in the positioning and in the procedure of the contractors claims with regard to the property under dispute. The reason for such alterations have been made in regard to QuantumLeap and Pandemonium for the provision of the diverse outlooks. The present under JCT deals with the construction of the building projects relating to the residence. The JCT Standard Building Contract with Quantities 2016 covers the situations of the non negligent and negligent delays to the property.

The procedural steps to be taken under the contract by Pandemonium’s architect or contract administrator is response to above arguments are stated below. Initially the administrators of Pandemonium can argue well proper evidences that the act of delay was not on account of negligence on their party. They can state their points of arguments quite strongly by referring to the natural causes which had further caused their delay. In this case, the natural causes were the blizzards and the torrential rainfall. To add to this, there was flooding which created a further delay in their tasks. Further, the administrators of Pandemonium can argue in response that sub contracting the stonework decorations would have a difference in the work. The kid of work they received from QuantumLeap would not be the same if it was sub contracted to another company. The work already done by Arthur Hammer and Michael Chisel would be different from the works of the new people contracting. There would be lack of parity and the quality of the work could deteriorate.

Thus, QuantumLeap possessed the legal and contractual right to secure the essential adjustments and negotiations.

After having a look at the facts of the case it can be stated that QuantumLeap Construction Partnership possesses the right to sub contract the tackling of installation of the decorative stonework under the JCT Standard Building Contract and Quantities 2016. Despite Pandemonium Projects Limited, disagreeing to the sub contracting of QuantumLeap, by laying emphasis upon the side letter agreement, it cannot be stopped by Pandemonium. QuantumLeap was delayed from starting the developing of the residential property projects without any fault or negligence on their parts. It was due to the negligence of the Pandemonium advisors that the work got delayed. QuantumLeap could not have access to the sites of the developing property because the staff of the Pandemonium company did not pay much heed to the work. The work got delayed by 12 weeks. QuantumLeap and the workers employed under them had to sit idle without work all this while.

It is natural that during work, many activities are scheduled according to the timings of the works scheduled. Due to the delay that took place in the schedule, all the other schedules of the workers got disrupted. In this case, Arthur Hammer and Michael Chisel had a preplanned work after the winters. But it was disrupted on account of the delay created by Pandemonium due to the negligence of their staff. Consequently, Arthur Hammer and Michael Chisel had to leave the employment under QuantumLeap and go to work in Northern Ireland as per their schedule.

Relevant Case Law and Principles of Common Law Prevention in Relation to Delays

QuantumLeap wanted to proceed with the work and not cause any further delay. So they proposed to sub contract the same to some other workers. This was absolutely justified on the part of QuantumLeap. Since they were innocent and the initial delay was not in their hands they possessed the same right to sub contract. Despite the terms of the side letter, QuantumLeap possessed the contractual and legal right to proceed and sub contract the installation of specialist stonework decoration to a sub contractor. There could be an instance of setting aside from the rules of the side letter, because there was a necessity in this cause. Arthur Hammer and Michael Chisel were committed to work in Northern Ireland at that time. Had they not left England and left the employment of under QuantumLeap, then there would be a breach of contract on their part towards the owners of Northern Ireland. Thus, under a situation of necessity the terms of the side letter could be done away with. The protests from the Pandemonium Company on account of the side letter would not be taken into action. The side letter was not a standard form contract hence, the terms could be altered on the basis of necessity. The terms also would not be followed on account of the delay created due to negligence of the staff of Pandemonium Company.

To support the above instances, the case law of Linden Garden Trusts Ltd v Lenesta Sludge Disposals Ltd (1994) 1 AC 85 (HL) can be cited with regard to agreement between parties. In this case, Novation can be allowed by Pandemonium on the basis of sub contracting to another company. Citing another case law includes, Atwal v Rochester (2010) EWHC 2338 (TCC) in support of this answer with regard to assignment and novation.

The common law prevention principle and the related concept of the present time must at large operate to provide QuantumLeap with a pragmatic approach under similar times under the law of general principles of contract. If QuantumLeap does not take the help of the JCT or the regard to the specialist stonemasons or sub contracting, then such a situation can be resolved with the help of the general principles of contract law.

Under this law, there are special kinds of contracts known as the standard form contracts. Under these contracts the terms and conditions of the deal are not defined as per a particular situation but the terms and conditions are made on a general basis. The parties have to abide by such terms and conditions. But here can be a situation when an emergency or a necessity may arise whereby the terms and the conditions have to be altered accordingly. In this way, the standard form contracts can be altered according to the needs of the people. If the current problem is applied to the ordinary people who are not advocates, or are not linked with JCT standard building contract with quantities 2016, then the parties under this contract namely QuantumLeap and Pandemonium can easily argue with each other on the basis of the delay and the negligence.

Comparative Piece: Performance Bonds vs Contractor's Default Insurance in Managing Risks in the Contractor/Sub-Contractor Relationship

It is often stated that time is the essence of contract and every contract must be performed with time specified and at the place scheduled. Under this case, the time was exceeded by 12 weeks from the date specified for the access of QuamtumLeap. Hence the performance could not be made. This delay created further delays in the future and it could never be completed on time. It was upon the contracting parties to either accept the contract performance after the delay or just avoid it. if it were avoided by the parties, then the contract would be frustrated. But, if the contract was undertaken to be performed after the delay then the terms of the contract would be altered as per the needs and requirements of the parties who has suffered the loss. The delaying party is bound to compensate the other parties for the losses incurred by them under the delay. These rules and regulations apply in the case of the above situation where time is the essence of the contract.

Under the law of contract, the remedy thus provided would be upon the parties delayed to decide whether they should proceed with the contract or just avoid it. under the common law prevention principle, if the performance is delayed after the contract has begun then the parties who has incurred the delay would be liable to compensate to the other party suffering loss. There are various case laws supporting the instances of time being the most important attribute of a contract. Some of them are stated: Henry Boot v Malmaison, The Royal Brompton Hospital NHS Trust v Frederick Alexander Hammond and Others. These cases have provided with similar results. For immovable properties the time would be the essence of contract and the above rules would be followed as stated in this case.

In this way, QuantumLeap can approach the pragmatic way towards achieving its wants from Pandemonium Company under the general principles of contract law.

In the contemporary era, there has been various situations whereby there has been a default in the insurance of the contractor with regard to the risk allocation mechanism in United States of America. This has been a replacement of the utilization of the stereotyped performance bonds. The current essay deals with the evaluation of the utilization of the performance bonds and the contractor’s default insurance with regard to the area of construction laws.

While putting an emphasis upon the relationship between the contractor and the sub contractor, the comparison and critical evaluation of the utilization of the performance bonds and the contractor’s default insurance has been discussed below.

A performance bond is commonly known as a contract bond. It is a kind of a surety bond which is undertaken by the insurance companies to provide a guarantee satiating attainment of any project undertaken by a contractor in the construction business. It recognizes the surety down payment of ‘uberrima fides’, that is good faith money which is made to protect the contracts and agreements of the future. This entire mechanism is known as margin.  

In United States, while tracing the Miller Act of 1932, all the contracts related to the construction which is undertaken by the government must always be supported by the performance and the payment bonds. Locally, the act is often referred to as the Little Miller Act under which the performance and the contract bonds hold a very significant position. Coming to the measurement, there are more than 30,000 kinds of performance bonds in the United States. Every such bond contains separate amounts of bonds. These bonds can help in the issuance of the rates of bonds upon the risk factors. The range covered under these factors, are under 2 10 15% of the premium.

The performance bonds usually measure the premium they demand for the purpose of securing the bonds. This protection is based upon three ingredients. These ingredients include the kind of the bond, the amount of the bond and the risks undertaken by the contractor. Once these ingredients are assessed and the appropriate amount of risk is measured specially, the bond would be designated with the appropriate cost for such bond. Under the contractor/ sub contractor relationship, the performance bonds have to be backed by bidding in a job. During an auction, for achievement of a job, the highest bid would be gifted with the job. It is then, that the utilization of the performance bonds come into action. This is not the case, with that of the default in the insurance of the contract. After the job is got, the performance bond would act as a security for the completion of the procedure. An instance can be taken under such a situation. For example, a contractor or a sub contractor can undertake the performance bond in support of the client for whom the construction business of a particular project is undertaken. In case, there is default in the construction, as per the rules and regulations laid down in the contract, then the client would be given the damages for any kind of loss incurred by him. The position of the client would be made good and he would be compensated by the defaulter by all means. Upon the comparison with the default insurance of the contractor, the situation is different. The insurance procedures comes into action only after the creation of a default on the part of the contractor.

The performance bonds are usually utilized in the construction fields and where are upcoming real properties. The contractor or the sub contractor may need to come under an agreement with the person who is developing the business activities. This agreement would create an assurance between the contractors or sub contractors and the developer upon such performance bonds that there would be guaranteed results of the work. The performance bonds also guarantee that there would be compensation given to the person suffering loss due to the default of the other party. This is not the situation under default of a contractor’s insurance with regard to the relationship between the contractor and sub contractor.  

In other situations, the performance bonds can be undertaken in other contracts of a larger basis. The case is similar is civil construction cases. Another example can be taken for this situation. Where the person who is selling products is requested to give a performance bond for the guarantee the purchaser that in case the product which is being purchased is not provided to the purchaser within the time specified the purchaser is entitled to receive the damages for losses incurred by him. The undertaking of a performance bond is considered as a part performance under the civil law. This is because the guarantee for the losses are granted at all times. The performance bond where it is providing a guarantee that the contractor or the sub contractor would be liable to make good the losses incurred due to the labor charges or the pricing of the raw materials, the same people would be bound to do the same.

 The primary worry for any contractor  or sub contractor upon a construction project is whether the fellow contractors would be able to give their best in the performance of the work. They also worry whether such completion would be under the specified time limit. During the previous occasions, the contractors usually laid stress upon the performance bonds in order to secure themselves, their projects and interests upon the case when a sub contractor or a fellow contractor committed any breach. The major distinctions between the performance bonds and the contractors default insurance between the relationship of a contractor and a sub contractor arises from the following fields. Performance bonds are age old procedures while the contemporary era lays stress upon the contractors default insurance. The purpose of the above is similar to that of the performance bonds.

When the sub contractor commits a breach, the person holding the insurance that is the insurer would be liable to make good the losses and perform all the pending tasks. Such contractors default insurance incorporates within itself, the various ingredients. These include, the price of amending the work which are up to the mark or contains flaws. The legal and the professional remuneration, the price of attainment of the entire task, price of the examination of the breach or default created in the works to make it flawless, liquated damages, work enhancement and increasing the overhead pricing are all inclusive under the head of contractors default insurance. This is very much different from the performance bonds.

Under the default insurance, the contractor is solely entitled for the insurance to the insurer, and has to see that the premium has been paid within the reasonable time or the specified time. The application of the taxes and other things to be deducted are all inclusive under it. contrary to this, the performance bonds are attained by the sub contractor and it is he who is solely responsible for the same activities. He must pay the collateral security in order to undertake the bond at the right time. Thus, the differences between performance bonds and contractor default insurance with regard to the costs were given above.

The next area of differentiation between the two includes the default and the performance factor. With regard to the contractor default insurance the contractor is again the sole responsible man for understanding whether the sub contractor is guilty of any breach. In case of the commitment of any such breach, he would possess the responsibility of making things normal and compensate for the losses. Whereas, under a bond the collateral security provides with a fair chance to examine the situation. Opportunity is provided to find out as to whether a breach has been really committed or not. If the examination provides with a positive account, then alternative contractor would be brought in he would undertake the responsibility of the completion of the task.

Under a contract default insurance policy, there can be incorporated a huge diversification of the prices. Examples of such prices include the remuneration to the advocates, overhead prices. Upon the comparison with the performance bonds, there lies an absence of the specification of such prices. The recoverable prices are not as ascertained as the former.

Under the contract default insurance, the capital have to be submitted to the contractor and not the sub contractor. Moreover, the insurer under this policy can later examine in the trials that the sub contractor had not committed any breach. In such a case, it becomes the duty of the contractor to repay all the costs and damages. The contractor possesses the responsibility of making good the losses and repay back the capital. Under the performance bond, the surety is dependant upon the defences of the sub contractor. The surety protects the demands of the sub contractor against the contractor and then finds way to indemnify himself from the capital of the contractor.

The next point of differentiation between the contractor default insurance and the performance bonds are regarding the exclusions. A breach under a contractor default insurance can easily recognize the exclusions made. These exclusions include the elements which can make the contract voidable on account of consent. The exclusions include, fraud, coercion, misrepresentation, breach in the policies upon the specified period. All these can included under the above grounds to bring these under the contractor default insurance sector. On the contrary, the performance bonds do not have any space for exclusions under its sphere. In this way, the contract default insurance is different from the performance bond.

To support the above the instances, the case law of Peak Construction (Liverpool) Ltd v McKinney Foundation Ltd (1970) 1 B.L.R. 111 provides with the differentiation. Greater London Council v The Cleveland Bridge and Engineering Co. Ltd and Another (1986) 34 B.L.R. 50. Also provides with information with regard to the above facts.

Thus, it can be concluded that there has been subtle differences between the performance bonds and the contractor default insurance. The above facts and information provides with a clear cut concept of each of the topics and their differences with each other. The former was proved to e very effective from the traditional aspects while the latter was prevalent in the modern day approach. The comparison stated above provides with case laws to support the inferences stated here. The relationship between the contractor and sub contractor is also established.

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